Net Assessment is a tremendous opportunity for a strategic renaissance – we must get it right from the beginning

Speaking last week at the annual lecture by the Chief of the Defence Staff (CDS), the professional head of the Armed Forces, General Sir Nick Carter, spoke of the need to restore ‘net assessment…to our strategic force development’. His comments were part of a speech which saw him call for the UK to shift away from a peacetime mentality as rising states like Russia, China and Iran increasingly challenge the Western liberal order.

This recognition of the need to improve British strategic thinking comes a month after Policy Exchange published A Question of Power: Towards Better UK Strategy Through Net Assessment. The report contained a Foreword by one of General Carter’s predecessors, General Lord Richards of Herstmonceux and was endorsed by the Defence Secretary, Rt Hon Gavin Williamson MP (who earlier announced the creation of a “Strategic Net Assessment capability” within the Ministry of Defence).

But what is net assessment and what can it do to help the UK confront its enemies? Developed in the United States (and credited with helping to win the Cold War), net assessment is a distinct framework and process for long-range strategic analysis. The work is concentrated within a small, specialist team which operates independently from the main defence establishment, reporting directly to the top political authority – in the US case, the Secretary of Defense.

This type of sponsorship frees net assessors from bias towards a particular branch of the services. They are also liberated from departmental hierarchies, and detached from the immediate, short-term pressures that ordinarily swamp proper strategic thinking. This means that a net assessment team is able to develop frank, impartial assessments of our enemies’ strengths and weaknesses – together with those of our allies and ourselves, and to supply hard-nosed, impartial analysis directly to the final decision-makers.

The analysis itself is complex and requires careful implementation. Net assessment involves the multi-disciplinary close examination of myriad qualitative and quantitative aspects of military power in all its dimensions. These range from morale, training patterns and subtleties of doctrine to the field performance of weapons systems and the minutiae of logistic capabilities. Not only are these sets of analyses and calculations considered in dynamic relation to each other – i.e. combined into an integrated picture – but the entire exercise is projected into the future.

The idea is to determine what the balance of military power in the international system will look like over the long term, on current trends; and exactly where are the pressure and inflection points on those trend lines, on which one can operate strategically, with minimum effort and maximum strategic benefit. This type of analysis thus offers a way to navigate successfully a long-term military competition based on informed calculations, particularly at a time of resource constraints. But this is incredibly hard, sensitive, time-consuming and complicated work – which is why net assessment requires particular conditions in order to deliver and thrive.

The re-emergence of similar strategic conditions last seen in the Cold War demands a robust response. As Lord Richards has said in connection to the launch of our Policy Exchange report, “Britain needs to rediscover the mentality that helped to win the Cold War if we are to deal effectively with emerging threats like Russia and Iran.”

To his credit, General Carter appears to have recognised the complexity and the importance of fidelity of implementation required to ensure net assessment reaches its potential. On 4 December, giving evidence to the House of Commons Defence Select Committee, Sir Nick spoke of “introducing the idea of net assessment” in the MOD, “not only to challenge some of your well known and enduring assumptions, but to provide proper empirical evidence, both in the match to your opponents and to your allies”.

On that occasion the CDS also envisaged net assessment as part of a “process of constant adaptation”, and pinpointed one of its functions as making military-capability comparisons “over time, particularly in terms of the NATO alliance in relation to a potential opponent like Russia.” As far as top-level descriptions of key outlines of net assessment go, this is, in our opinion, quite accurate.

The devil, of course, will be in the details of practical implementation – we must be wary of bureaucratic empire building. One set of concerns lies with the institutional aspects of the project. Our report recommended following closely the Pentagon’s time-tested, successful model, establishing a UK Office of Net Assessment that would report directly to the Secretary of State. This is to ensure the Office will remain free of competing departmental and Service agendas, focused on the genuinely long-term questions (rather than being caught up in the SDSR work of the day, for example) and able to “speak truth to power” on a range of issues.

The other challenge is protecting net assessment from being pressed into “ordinary service” as just another analytical tool among others in support of the departmental priorities of the day. The establishment of a net assessment capability will inevitably draw interest from many quarters of the MOD and, indeed, beyond.

It is important that the demands placed upon net assessment are grounded in a full appreciation of what it is supposed to do. In some cases this can be a question of nuance, for example when net assessment and wargaming are sometimes mentioned – as they were by the CDS – in the same context as instruments for testing new concepts. The meaning of such phrasing is open to interpretation but it may indicate a sense that net assessment is still seen in Defence as something to be integrated with or added to other existing frameworks and methodologies, rather than as a standalone analytical instrument specifically designed for a particular type of analysis. Net assessment uses wargaming as part of its own process and indeed the very quality and authenticity of a nation’s wargaming is something to be ‘net assessed’.

As net assessment is being introduced in the UK today, such distinctions are worth reflecting upon with redoubled attention. Quite apart from its immediate uses, an MOD net assessment capability – ideally, established as a dedicated Office – is a tremendous opportunity for infusing new thinking and initiating a wider “strategic renaissance” within the UK national security community. We must get it right from the beginning.

When the EU Withdrawal Agreement comes before Parliament in a few weeks, MPs will be asked to accept the deal on offer – or to risk ‘no deal’. The latter has been almost universally described in the media as “catastrophic”. One Cabinet Minister has been quoted as being “terrified” of the prospect. A former minister recently declared that under no circumstances could he support a Brexit based on no deal.

At the same time, the Withdrawal Agreement on offer is clearly unacceptable to many. The Government has promised to lock the UK into a Customs Union of uncertain legal basis, and Northern Ireland also into the Single Market, in both cases until an alternative arrangement is agreed. This alternative will need to adhere to the agreed conditions for the Irish border backstop. If Northern Ireland is not to be treated differently, this will mean that the requirement of remaining within the Single Market and Customs Union will also apply to the whole of the UK. The UK will neither be able to decide its own product regulations, nor to strike new free trade deals with countries outside the EU.

Why tie us down in this way? These measures are apparently to secure frictionless borders at roll-on, roll-off ports as well as in Ireland. We must assume that promises were made to UK car manufacturers early in the Brexit process that this would be so. But little work has been done to look at alternatives to remaining in a customs union in order to achieve frictionless trade. Customs experts have been ignored. Only last Monday, speaking to the Commons Northern Ireland Affairs Select Committee, the previous head of the World Customs Association, Lars Karsson, clarified and reinforced his frequently expressed view that modern technology can do the job (here). Hans Maessen, a Dutch customs specialist, also testified that technical solutions could work to ensure no hardening of the Irish border in ways that damage the 1998 Belfast Agreement and Peace Process. The heads of UK and Irish customs have both asserted that invisible borders are now possible. This can all be achieved with existing technical solutions, and in compliance with the EU’s Union Customs Code.

A Canada-style FTA is still possible

Together with modern customs arrangements and the latest technology, it is clear that a Canada-style free trade agreement will be sufficient for UK needs. Zero tariffs and a regulatory coherence and regulatory cooperation chapter in an FTA will protect companies and jobs from excessive disruption. The customs technology to minimise or avoid border checks is available and is being used elsewhere. Physical checks for such things as phytosanitary concerns are conducted away from borders in many countries and need not cause hold-ups at Dover, Calais or anywhere else. All of this could be done in Great Britain and Northern Ireland to meet the needs of ‘just-in-time’ manufacturers and to avoid new border infrastructure in Ireland.

HMRC says it is advanced in setting up the systems for electronic customs clearing, a key aspect of invisible borders (although a 20-month transition period will help its preparations). The IEA’s ‘Plan A’ details the necessary arrangements (here). In other words, the UK could now change tack and say it prefers a free trade agreement, thereby making the Withdrawal Agreement’s UK-wide and Northern Ireland backstop arrangements redundant. EU negotiators may say that the negotiations have been concluded and initially refuse to talk further, but the UK has a number of cards to play.

What is at risk for Ireland and the EU?

Brussels wants an agreement – not least to secure its £39 billion without protracted court action – but continues to insist on an Irish backstop. However, if the UK threatens ‘no deal’, the prospect looms of the EU forcing Ireland to conduct checks at the Irish land border. Contrary to what the Government suggests, this is a comprehensive agreement with the whole of the UK with regulatory co-operations, customs facilitations, and Irish border facilitations. But no deal would be a disaster for the Irish beef and dairy industries; these would either be exposed to tariffs or would have to face competition from all over the world, if the UK had to apply zero tariffs on a Most-Favoured Nation basis to curb food price inflation.

The likely challenge for the Irish Government may lead them into a scramble to arrange checks away from the border that trade experts have long said are possible. The deep irony is that while the EU threatens no deal if it fails to secure an Irish backstop, in the event of no deal it would not secure the invisible border in Ireland that it desires. It is a bit like threatening to shoot itself in the foot if it does not get its way. Irish intransigence on the backstop has pushed the UK into agreeing all-UK measures that are likely to be unacceptable to Parliament and may thus prevent the free trade agreement which is strongly needed to reduce incentives for smuggling by armed gangs at the Irish border (as well as at the English Channel, where tobacco smuggling has been big business).

Are there dangers for the UK?

In other words, the UK has some bargaining clout to get a different deal but only if the prospect of no deal has credibility as a bargaining position. What are the dangers to the UK in adopting this course? What is meant by no deal? A free trade deal is in everyone’s interest and the aim should be to negotiate one quickly, preferably within a 20-month transition period. This would be the world’s first free trade negotiated between countries which already have both free trade and full regulatory identicality. Negotiating a continuation of the status-quo should be vastly easier than the focus FTAs normally have on protectionist tariffs and aligning disparate regulatory regimes.

It should also be pointed that if the meaningful vote goes against the government, this does not necessarily mean an automatic ‘no deal’. Instead, it may well be the only way to obtain a reset of the negotiations leading towards a Canada-style free trade Agreement. In this context, a Withdrawal Agreement is still very possible. After all, the EU has already offered a free trade agreement and the UK has guaranteed no hard border in Ireland. A transition period with no new tariffs and no immediate border checks would be very helpful but would require Brussels to accept British bona fides on avoiding a hard border in Ireland without a formal backstop. The EU will be reluctant to back down from its current position of supporting the political needs of a small member state and will inevitably push this to the eleventh hour. Strong nerves will be needed but self-interest suggests that the EU will do a deal.

Can we take the risk that Brussels will not finally back down and that next April UK firms will be faced with EU tariffs and potential regulatory checks on goods crossing the EU boundary? And what about the threats made by France’s European Affairs Minister that EU rules mean that UK flights will not be allowed to land in the EU and Eurostar trains will be stopped at the tunnel? Or that safety certificates on aircraft and parts will be withheld? None of these is at all likely and visa-free travel has already been agreed.

In the event of no deal, tariffs and regulatory checks could be highly disruptive for a minority of UK businesses, especially those connected with dairy products and meat where EU tariffs will top 20% and also with fresh foods which cannot tolerate long delays. However, EU preparations for no deal only say that checks may be conducted – not that they will be. In any event, new technology is already being installed at Calais to ensure that checks involve minimal disruption to traffic. Problems in the Northern Ireland dairy sector would be greater but could be managed through subsidies.

An exaggerated threat

Most engineering firms will be little affected by tariffs which is why heads of firms like Dyson, JCB and Northern Ireland’s Wrightbus support Brexit. Even car companies can withstand 10% tariffs on sales into the EU and 4.5% tariffs on components from the EU since they have benefitted from a 15% depreciation in Sterling. Border checks on their components from the EU will be unnecessary, counter-productive for EU exporters, and illegal under WTO rules (which prohibit unnecessary checks undertaken for political reasons or for competitive advantage). With modern customs clearing arrangements and border technology it is unlikely that just-in-time manufacturers will be greatly inconvenienced by no deal, although they will of course prefer a completely open border within a customs union and single market. Business must be preparing for this possibility now.

The much-feared 20-mile lorry-jams, already prompting diggers to begin work on expanding the M26, must come from a danger that French customs will instigate unnecessary checks at Calais and elsewhere. Congestion at Calais could then lead to constraints on ferries leaving Dover and hold-ups in Kent. Goods which were deemed perfectly safe on 29th March would need to be judged suspect on 30th March. If the UK undertook not to alter any product regulations through the transition period there would be no need for regulatory checks during this period but checks might be undertaken anyway due to a strict and purblind application of EU rules. This would be equivalent to sanctions on a hostile regime, albeit defended by the EU on grounds of normal procedure. It is politically unlikely to happen or to last for any stretch of time, especially if the UK threatened retaliation on EU exporters.

The need for EU pragmatism

Prohibition on landing rights and refusal of certification on aircraft, cars or vehicle parts come under the same category. Strict and bloody-minded application of EU rules could lead to severe problems, but again is politically unlikely. Several French regional airports derive close to 80% of their traffic from UK-owned airlines and local tourism would be ruined by prohibitions.

Jose Manual Barroso, former President of the European Commission, recently said that the most important aim of the Brexit negotiations should be to avoid deep and lasting resentment. While wild threats will of course feature as bargaining gambits, one would expect EU pragmatism to avoid hugely provocative and inflammatory actions which are easily avoided by hastily agreed side deals. To do these, President Macron is taking on extra powers. The Irish Foreign Minister has said that, “if it looked as though Britain were heading towards a no-deal departure from the European Union then direct discussions on how to avoid a hard border would be required.” Mr Coveney added that those talks would not be easy (here).

Like the millennium bug, ‘no deal’ lodges itself in the mind as a fear of the unknown. Our current political predicament means that we need to quickly unpack the dangers and provide a rational assessment of the risks. We have some good bargaining chips. Let’s use them in the national interest to avoid this unsatisfactory Withdrawal Agreement.

We’re delighted to announce that this November will be “Building Beautiful Month” at Policy Exchange, the next stage of our efforts to address the housing crisis, the major domestic policy issue of the day. It is part of a new focus on Place – one of our four Ps, along with Prosperity, People and Patriotism, that guides our research. We will hold three important public events, with speakers including Rt Hon James Brokenshire MP, Secretary of State for Housing, Communities and Local Government and Housing Minister Kit Malthouse MP, and publish an essay collection on how the right sort of architecture and building can help to solve the housing supply crisis.

The focus of the month will be – in practical and economic terms – how new homes can be built in the ways the public like and want. We hope you will join us, and add your voice to the conversation, at our events during Building Beautiful Month:

Marwa Al-Sabouni speaking on “The Loss of Home”, 13:00-14:00 on Thursday 1st November. Marwa is a practising Syrian architect, whose book, The Battle for Home, was published to acclaim in 2016. She lives in Homs and has seen first-hand, through the prism of the Syrian civil war, how the wrong kind of built environment can lead to social breakdown and even conflict, an aspect of the war that has been utterly overlooked in the West. Marwa’s talk will offer insights into the Syrian housing crisis, before and during the civil war, and crucially what lessons can be learnt from it in the UK’s cities. Before her talk, Rt Hon James Brokenshire MP will meet Marwa and her mentor, Sir Roger Scruton, accompanying both of them on a tour of London that looks at some of the capital’s best and worst architecture. Sir Roger Scruton will also speak in conversation with Marwa after her speech, which will be introduced by Tom Tugendhat MP, who represents Tonbridge and Malling, a constituency where the green belt is cherished and people are suspicious of new developments changing their community’s character.

Building More, Building Beautiful conference, 18:30-20:30 on Monday 19th November. Following our report of the same name, with speakers including Kit Malthouse MP, the Housing Minister, Ben Derbyshire, the President of the Royal Institute of British Architects, Anne Ashworth, Assistant Editor at The Times, Dr Demetri Porphyrios, architect and masterplanner for the King’s Cross Central redevelopment, Paul Finch OBE, Editorial Director of Architects’ Journal, and Roger Madelin CBE, Head of Canada Water Development at British Land, this event will bring together house builders and architects to debate some of the questions we set out in the report: what is the public’s preference when it comes to the designs and styles of new homes? Should we care what the public think? And – in practical and economic terms – how can new homes be built in the ways the public like and want?

Our agenda-setting poll and report showed the public are much more likely to consent to new homes when they are built in designs and styles that are popular. As the government takes to its aim of building 300,000 new homes per year, the report puts forward a policy programme for design and style to be a more prominent part of the housebuilding process. Some of this programme has already been adopted by government – for instance the much stronger emphasis on design quality in the National Policy Planning Framework – yet there is more to be done, for instance greater local authority adoption design codes and style guides.

In this report we argue for the redevelopment of London’s Boxland into genuinely mixed use neighbourhoods where people want to live. We define Boxland as plots in London which are currently dominated by industrial and retail uses in the shape of ‘big box’, single storey sheds. Boxland could be used more efficiently by combining commercial and residential uses in a more efficient manner in traditional street patterns.

The annual hate crime figures released today (Tuesday) revealed another dismal increase in recorded incidents: a 17 per cent annual increase to 94,098 in total incidents 2017-2018 and what the BBC called a 40 per cent “surge” in religion linked incidents from 5,949 to 8,336.

Every act of incivility based on prejudice against a group is a small blow to a civilised society but it is important to point out that the figures just published do not signify an actual increase in incidents of hate. Overall, the story is, in fact, a good one: reports are rising, because there is much more encouragement to do so and the police take it far more seriously than they used to, but actual numbers are almost certainly falling.

And we now have new evidence to suggest that, contrary to the widely held assumption, the Brexit blip in reported hate crime after the referendum did not lead to any more lasting increase in bigotry.

The graph below shows the historical trend in recorded hate crimes. In 2012/13, there were just 42,255 hate crimes overall so the number has more than doubled since then. Breaking down this year’s figure of 94,098 by protected group category, easily the largest remains race, 71,251, with religion accounting for 8,336. A further 11,636 were related to sexuality with disability accounting for 7,226 and transgender 1,651.

But, and it is a very big but, that story of rising recorded hate crime must be placed in the context of our other source of evidence for hateful acts, the Crime Survey of England and Wales. This tells a very different story that was barely mentioned in the media reporting of the hate crime figures.

The Crime Survey, based on a very large survey of individuals, is an important data source as not all crimes get reported to the police. It provides an estimate of all crimes, independent of public willingness to report, and is therefore considered to be the gold standard in crime statistics. Crime Survey numbers on hate crime are released every three years and are presented as three-year averages in order to ensure a large enough sample.

The figures show that in 2015/16 to 2017/18 there was an average of 184,000 hate crimes across all strands each year. That is down from an average of 307,000 each year between 2007/8 and 2008/9.

Religious amount to 39,000 each year and this has budged little since the 2000s, as seen in the graph below.

So the number of hate incidents has been falling sharply according to this more reliable indicator, albeit from a higher base. (Though Policy Exchange research suggests there may be some reason to doubt the scale of those Crime Survey numbers.) The smallest decline has been in the area of religious intolerance but even here the numbers are broadly flat, so hardly a “surge” in actual religious bigotry.

All those, including the Government itself (see the green paper on Integrated Communities), who have sought to portray the country as less tolerant in the aftermath of the EU referendum would do well to take stock.

It is also worth noting that there has been no marked increase in the number of successful prosecutions for hate crime incidents which have remained around the 12,000 mark for several years and actually fell slightly last year.

And, thankfully, most incidents remain non-violent. Every 7 out of 10 recorded hate crimes were to offences relating to ‘stalking and harassment’ or public order offences, the vast majority shouted abuse. Just 7,639 were violent and resulting in injury.

These numbers come on the back of the Government’s “refreshed” hate crime plan, amounting to new measures to tackle the problem.

The most eye-catching announcement is a new review by the Law Commission into hate crime, to see if legislation could be made more effective and if the definition should be expanded to include misogyny and misandry (prejudice against men), age, as well as subcultures such as goths.

Also announced was an extension of public funding for security measures for religious sites of worship, more training for police, a revamping of the True Vision reporting website (an online reporting mechanism), and £1.5 million for civil society groups including the Anne Frank Trust and Kick It Out. There will also be ministerial round tables on anti-Semitism and bigotry directed at Muslims.

All this is welcome but there is a danger that further extensions to the definition of hate crime risks undermining how seriously the whole issue is taken. Furthermore, the Government needs to make clear how these funded groups are going to spend the money and by what standards they will be judged to be effective or successful.

The Prime Minister’s announcement last week that ‘austerity’ would end and that the Conservative Party had got the message is good politics. Post-Brexit, the Conservative Party has a political challenge. This is to turn itself into an effective people’s party that enjoys broad support of the sort that the post-war right-of-centre parties attracted in countries such as Australia, Austria, Canada and West Germany. This has to be based around practical notions of social security, prudence, opportunity and community. It involves a welfare state that works for people, an economy that can generate jobs and rising private living standards that are protected by effective borders, police services and strong defences.

A Social Market Economy that works for people

Any budget or comprehensive spending review should read like a political vision with numbers attached. The Prime Minister and the Chancellor need to fashion a public spending agenda that does that. The starting point should be what the UK has got right. It is a large, wealthy economy with high levels of employment, a trend rate of growth higher than most of its continental neighbours, a budget deficit that is moving towards rough balance and public finances that are under control. It has a framework of taxes and benefits in cash and in kind that significantly modify household income in favour of the bottom third of the income distribution. In short, the UK is a social market economy that works.

Britain is good at extracting large amounts of tax revenue from the very top of the earnings distribution – the top 1% of income taxpayers contribute more than a quarter of all income tax. This suggests that it in terms of maximising revenue yield, little more can be obtained from the top and a significant rise in public spending can only be financed by levying a higher effective tax rate on households in the middle and lower part of the income distribution. This is both an economic and a political constraint on the spending ambitions of any government. It is a particular constraint on a Conservative administration that, recognises the importance of giving individuals and families the opportunity to spend more of their own money.

Realism about what can be achieved

The Government’s approach to the spending review should be informed by realism. This should start with the appreciation that all public spending involves a real resource cost. This is greater than its cash cost, because of the deadweight costs and economic distortion that arises from the taxes necessary to finance it. There are diminishing returns to public spending and it involves opportunity costs. Public spending that yields clear economic and social returns, including spending on the welfare state, enhances the performance of the economy, but beyond a certain point the cost is greater than the return and government spending begins to crowd out private sector economic activity and the tax base that public spending depends on. Vito Tanzi, in his seminal work on international public finance, suggests that by the 1960s and 1970s most advanced economies had taken public spending to the level where returns were diminishing and it crowded out private activity. The choice governments in advanced economies face is between higher spending today and a slower growth in the tax base; or lower spending and a stronger tax base that can finance higher overall spending at a lower ratio of national income in the future.

Spending priorities

Realism about these constraints does not mean that the Government cannot fashion a prudent and attractive public spending programme that increases discretionary spending on specific programmes, reorders spending priorities and sets spending in the context of a falling stock of government debt and ratio of public spending that is contained as a share of national income to below two fifths of GDP. Such a programme would focus on targeted spending on programmes that exhibit obvious pressure and give greater priority to important functions that have been neglected.

There are two broad areas of public spending that have been neglected and under-resourced for more than a generation. These are defence spending and spending on social care. The issues surrounding social care can be traced back to the 1940s when the NHS was set up. The neglect of defence spending arises from the Options for Change White Paper in 1990, the determination to achieve an unrealistic peace dividend following the end of the Cold War and from a transformed and contemporary challenging international environment.

Further targeted spending

There are also areas of spending that need focused discretionary increases in spending. These include certain parts of local authority spending, such as children’s services and the support of adults with disability. Spending on police, prisons, probation services and courts have been squeezed for more than twelve years. Mental health and related community services also need targeted help.

Learning from past mistakes

The Government should try and learn from the mistakes of previous governments. Big discretionary increases in spending programmes do not yield results that are consistent with the additional resources applied.

A swift unrealistic increase in spending tends to inflate the cost base of the public services rather than increase its output. Many ‘resources’ in the public sector do not turn simply on money. Occupational therapists, speech therapists, mental health practitioners and probation officers require training, experience and unusual qualities and temperaments. Large increases in capital spending without the revenue budget to pay to service the hospital operating theatre or school laboratory will fail. A large part of the disappointment of the New Labour spending was the mismatch between new capital assets and the absence of trained staff that could be recruited to work in them. The best results will come from spending on mainstream services rather than trying to establish parallel services that, for example, replicate the work of health visitors or social workers working on child protection. In terms of capital investment, the greatest results tend to come from smaller local projects rather than large, high-profile infrastructure projects. The highest returns of all come from maintaining what you already have by repairing things properly.

The discretionary increases in public expenditure between 1997 and 2010 provide a cogent cautionary tale. Public spending rose 114 per cent in cash terms and 59 per cent in real terms. Yet increased spending did not translate to commensurate improvements in outcomes. The ONS measurement of productivity in public spending – an innovation arising out of the New European System of national accounts – shows that productivity fell. In contrast, since 2010 public sector productivity has increased and increased noticeably in health spending. A more careful and incremental approach to public services is likely to yield better results than huge increases in cash spending.

Making public spending more efficient

There are still big efficiency issues in public spending, particularly in central government spending , which has not been subject to the same degree of fiscal constraint and adjustment as local authorities. The public would welcome a serious attempt to increase the results from what the taxpayer already spends. There needs to be more information from central government departments about their unit costs and the results of their spending. Since the mid-1980s, governments have shied away from managing their own cost base. The public sector wage premium remains in place, pay and pensions for people doing similar work to other people working in the private sector still look generous. Managing staff at work in terms of getting the most out of them remains an issue. There continue to be losses of X-efficiency. To avoid the difficult task of controlling its own cost base properly and managing its work force effectively, the public sector has relied on outsourcing. This has helped to contain costs but at the expense of efficiency and reliability in service provision. The time will come when the public service will have to look at these issues again robustly. They involve awkward matters, such as sickness at work, regional pay and the generosity of pensions. Yet they are questions that go to the heart of the public sector’s efficiency, effectiveness and economy.

Yesterday’s announcement that the cap on local authority borrowing for the building of new homes will be removed is welcome. As the Prime Minister outlined in her speech to the Conservative Party Conference, “There is a government cap on how much [local authorities] can borrow against their Housing Revenue Account assets to fund new developments… It doesn’t make sense to stop councils from playing their part in solving [the housing crisis]. So today I can announce that we are scrapping that cap.”

The announcement is welcome because local authorities have yet to play a significant role in directly tackling the crisis in housing supply. MHCLG figures show that last year just 1,870 new homes in England by local authorities with powers and responsibilities for housing (i.e. district and unitary councils). More than two thirds of these were built by just six local authorities – Camden, Stockport, Nottingham, Harrow, Ealing and Telford – while 288 local authorities with responsibility for housing of 326 built no new homes at all. Some local authorities have set up arms-length commercial housing companies, but it has been reported that, as of February this year, they had delivered only 528 homes across the country and only 35% of these were ‘affordable’.

Compare this to the three decades after the Second World War, when English local authorities were building hundreds of thousands of new homes every year, and we can see a major reason why not enough new homes are built today. While housing associations are building around 25,000 new homes every year, there remains a significant gap between the supply of social housing and the need for social housing. Figures from MHCLG show over 1.1 million households are on local authority housing waiting lists in England. A significant number are also living in temporary accommodation that is often inappropriate and of poor quality.

It is in this context that giving local authorities greater freedom to finance the building of new homes through their Housing Revenue Account (HRA) is a breakthrough in government policy. Research by Savills in 2017 found more than four in five local authorities with an HRA were operating their business plan within 20% of the HRA debt cap. By providing local authorities with greater capacity to borrow, they will be able to finance more new developments. This point was made at one of Policy Exchange’s housing fringe events at Conservative Party Conference earlier this week. Bob Seeley, MP for the Isle of Wight, argued that his council is prevented from building the homes they know islanders need because of a lack of finance.

Yet, as welcome as the announcement is, it raises a number of issues that Government and local authorities will need to contend with if the policy is to be successful.

Firstly, the large majority of local authorities are simply not set up for the large-scale construction of housing any more. Just 38 local authorities, mostly urban authorities but some of which are rural, built any new homes last year. Almost a third of local authorities don’t even have an HRA to borrow against (because they have transferred their housing stock to housing associations). This limited experience and expertise in building homes – which, after all, is a complicated business requiring appropriate sites for development, the securing of planning consent, the procurement of design and construction etc. – means that it could take a long time for councils to take full advantage of this new borrowing freedom.

Secondly, while one barrier to local authorities building new homes has been removed, many still remain. One barrier, for instance, is that building homes requires a huge amount of will and ambition. Many local authorities will not choose to divert resources away from managing other pressures like social care services.

Another barrier is that council leaders, however ambitious, will continue to come up against councillors and a general public who oppose the building of new homes in their areas. NIMBYism is often justified – a point made by Tom Tugendhat MP at another of our housing fringe events at Conservative Party Conference where he argued there is nothing wrong with wanting to protect the asset you have worked hard to own. But as polling for our recent Building More, Building Beautiful report found, building new homes in designs and styles that are popular is a large part of the answer to overcoming this NIMBYism. Even if new social housing is typically designed and built to a standard as good as, if not better, than the private market, many people continue to associate ‘council houses’ with poor build quality and building styles they do not like. To therefore secure the support of communities for new social housing in their area, local authorities should aim to build new homes in popular designs and styles and in harmony with their surroundings. As the Prime Minister said last month in her speech to the National Housing Federation, “As you look from building to building, house to house, you should not be able to tell simply by looking which homes are affordable and which were sold at the market rate.” Our polling, illustrated by the graph below, shows this is what social housing tenants want too.

The polling also shows social housing tenants tend to want new homes to be built in a traditional style, as illustrated by the graph below.

Thirdly, there is the issue of how much money local authorities will actually be able to borrow against their HRA – and the extent to which that money can be used for a large increase in housing supply. There are a number of questions. How much can a local council borrow prudently against its HRA housing stock when its present social use value will be very different from its open market use value in terms of credit risk? To what extent does past borrowing and historic debt impact their capacity to borrow now? With around two thirds of the 3.9 million households who socially rent also recipients of housing benefit, how much debt will rental revenues be able to service when there are limited means to increase those revenues without implications for the housing benefit budget of DWP? Furthermore, with HRA borrowing also used to finance the repair of existing stock, will the first port of call for local authorities be repairing dilapidated stock or additional building?

In conclusion, yesterday’s announcement is a step forward for government housing policy. It means local authorities will be able to build more homes for those who are less well off and who cannot afford the private market. In the long term, it is also good for public finances, with more public money invested in new homes rather than being spent on housing low-income families in the private rental sector. Yet whether this leads to a step-change in the delivery of new council housing and whether that step-change is best delivered through borrowing against the HRA is a matter that we will only be able to answer in years to come. Let us hope that answers to some of these questions are provided in the Budget at the end of the month.

On both sides of the Atlantic, the normally specialist topic of corporate governance – rules governing the structure and administration of listed companies – is becoming one of the key political battlegrounds. In the US, Senator Elizabeth Warren wants to shake up corporate America with her Accountable Capitalism Act. This would require all companies with over $1bn of tax receipts to obtain a federal charter of ‘corporate citizenship’. It is not just the Democratic side championing these principles – President Trump has signalled he is in favour of scrapping quarterly reporting and replacing it with bi-annual disclosure requirements, in an attempt to tackle short-termism.

Here in the UK, it was Theresa May who began the conversation over two years ago with her pledge to put workers on boards and tackle what in her view are unacceptably high levels of executive pay. The loudest voice in this area now belongs to Labour’s Shadow Chancellor John McDonnell.

In the latest and most radical instalment of his corporate governance plans, he is proposing a mandatory transfer of up to 10 per cent of a company’s equity to a collective fund administered by worker representatives. The fund would pay dividends of up to £500 per worker a year, with the rest paid in tax. This would apply to every company with 250 employees or more, though UK branches of foreign companies would be exempt. This is a policy apparently designed to appeal to voters who feel that Britain’s market economy doesn’t work for them – that the benefits of capitalism have been hidden, especially since the 2008 financial crisis. It may prove popular too. A YouGov poll on the day of its announcement showed 54% in favour compared to 17% against, which is why the idea deserves to be thoroughly tested and seriously considered.

Companies with 250 employees or more make up about 0.1 per cent of total companies. They account for 40 per cent of employment and almost 50 per cent of turnover. 10 per cent share dilution in each of Britain’s biggest companies is a significant transfer, which makes the £500 limit all the more questionable. As it seems whatever is left over would have to be paid to the Treasury, this measure would – according to the estimates done by the Financial Times – net the Exchequer £5.9bn extra if it was in place this year. In other words, this policy could amount to a significant stealth tax as well as a bonus to employees.

The principle of employee share ownership is a good one. Market economies enjoy greatest political legitimacy when more rather than fewer people own capital. Equity ownership provides access to wealth for people who tend to rely solely on income. Over time, it can form the basis of more diversified portfolios and work towards addressing low levels of saving.

In addition, share ownership promotes a fundamentally different dynamic between the employer and the workforce. When the fortunes of a company are tied more closely to the material wellbeing of employees, this works to prevent the sort of industrial relations widespread in 1970s Britain, where ‘the going rate’ had to be paid to employees no matter how the company had performed that year, making it difficult to set long-term strategy or commit to significant long-term investment.

If employees are granted a stake in the company and all the rights and privileges of a shareholder, they will start to behave like one. This means being more understanding of decisions taken as part of a long-term strategy, but also using the experience and expertise built up over their time with the company to provide a new perspective at AGMs. They may push back against plans which may appear right to the management, but would be spotted as potential disasters if those who have to carry them out were consulted.

From the proposals put forward by Mr McDonnell, it is not clear whether these benefits would be achieved. Indeed, it is not clear whether they are the intended outcome in the first place. If John McDonnell truly cares about giving more people a stake in our economy – an admirable goal – why the £500 dividend limit? If the principle is one of sharing the fruits of labour, of greater participation in the proceeds of success, surely a particularly good year for a company should mean a particularly good year for the workforce? Surely the rewards of a successful expansion, or a successful product launch – the result of collective efforts of everyone in the company – should be as significant as the revenues from it?

Then there is the fundamental problem hiding in plain sight – under Labour’s plans for employee share ownership, no employees would actually own shares. The ‘Inclusive Ownership Fund’ would be administered by elected worker representatives, and presumably they would be the ones representing the interests of the fund at AGMs. There are many companies where 10 per cent of equity would make the fund by far the largest single shareholder. Who would be holding that power to account? How would the representatives be elected? How would the disagreements be resolved? Could it be that this is simply an attempt to give even more power to trade unions? Difficult decisions frequently have to be made about, for example, closing an unprofitable part of the business for the benefit of the group as a whole – how realistic is it to expect worker representatives to sign off on it?

There are also countless questions about how companies and markets will respond. Will this create a huge downward pressure on wages as companies attempt to offset the costs, eliminating the financial benefits for workers? Will they attempt to restructure to take advantage of foreign company exemptions, causing an additional hit to corporation tax receipts? Will companies on the brink of employing 250 people be disincentivised to expand, hitting growth? Will there be a further reduction in the number of companies choosing to list their shares? Would companies be disincentivised to continue the employee share schemes many of them already have, which do offer full voting rights and an uncapped dividend? These are just some of the problems, and we are yet to see any answers.

The Migration Advisory Committee report on EU migration is typically hard-headed and balanced and does not accept the often-repeated-as-fact argument that free movement has had clear economic benefits. As MAC Chair Alan Manning writes: “EEA migration as a whole has had neither the large negative effects claimed by some nor the clear benefits claimed by others.”

This is a remarkable statement in many ways given the consensus across so much of Whitehall and Westminster, and even more so among employers organisations and academics, that EU free movement has been a great economic boon.

The report argues for no special deal for EU citizens in the future but – and this will please most employers – a more light-touch version of the current regime for ALL high-skilled and medium-skilled immigrants, including the abolition of the 20,000 cap for so-called Tier 2 skilled workers from outside the EU (and a reduction in the cost and time of acquiring a visa for workers earning £30k or more).

The MAC also (in line with our own recommendations in Immigration after Brexit, January 2018) calls for a new Seasonal Agricultural Workers Scheme, an extension of the Youth Mobility Visa to younger EU citizens and an extension of the Intra-Company-Transfer scheme to EU companies.

But it rightly proposes no special route for low-skilled workers from the EU, something that the report points out “is likely to be strongly opposed by the affected sectors.” Sectors like food manufacturing and hospitality will be particularly impacted as they currently record around 30 per cent and 20 per cent (respectively) of employees from the New Member States (NMS). It is surely hyperbolic to suggest, as the Resolution Foundation did, that this “represents the biggest change to the UK labour market in a generation.” The stock of existing workers are not all going to disappear and that will give companies time to adjust by increasing wages or automating more processes, though it might also be worth taking up the Policy Exchange proposal of anti-social hours visas for some low skill jobs.

This argument over the value of the high quality/low-skilled employment from the NMSs to the UK economy as a whole goes to the heart of the issue. In the MAC’s March interim report it said this: “When demand conditions are favourable, it is natural for firms to want to be able to expand output and employment while keeping costs down. It is not so clear this is in the interests of the wider society—it might be better for favourable demand to translate into higher productivity or wages but a smaller increase in employment.” Exactly!

Given that perspective, it is a little surprising that the MAC research found no negative impact on productivity from the high flows from the NMSs. However its findings were tentative and the lack of a negative impact on productivity may be due to the fact that on average NMS employees tend to be higher quality (for a given level of pay) than resident workers, which might partly compensate for more macro productivity-suppressing effects.

It is also surprising that the MAC’s final report found no evidence of reduced employer training budgets as a result of EU migration despite reporting evidence of exactly that in its interim report in March. (And it seems not to have considered the work of Francis Green at UCL who has found that training spend per employee fell by around 15 per cent between 2005 and 2011.)

The MAC also took issue with the often-heard claim that NMS migration has had a positive fiscal impact. It found that EEA/EU migrants as a whole pay more in than they take out in services and benefits – but this only applies to people earning £30k or more, a small proportion of workers from the NMSs.

The report says the impact on public services has been minimal, a finding that will be challenged by some given that it has been one of the main public complaints arising from the higher than expected NMS migration after 2004. One exception listed by the MAC report is housing: European migration was found to have pushed up house prices and lengthened waiting lists for social housing.

The MAC did not attempt to analyse the more subjective cultural/psychological impact on communities that are sometimes changed rapidly by NMS immigration nor did it look at overall population size issues, which drew the opposition of Lord Green of Migration Watch.

Overall, this is a solid piece of work that the Government should broadly accept. The proposal not to have a separate regime for EU citizens in the future is probably a sensible one. It provides political cover to liberalise some of the more bureaucratic aspects of the current skilled worker visa scheme. Moreover, because immigration (outside the rules of free movement) is a member state issue, there would have been no automatic reciprocity for a special regime from other EU states.

As Brexit approaches and the international economy marks the tenth anniversary of the collapse of Lehman Brothers, people are thinking about what Brexit will mean for financial stability in relation to the UK economy, London as an international financial centre and the wider international economy. It is important to distinguish UK market access to the Single Market for financial services from issues relating to financial stability. The market access issues that turn on passporting, the rules relating to equivalence and ambitions the UK may have for ‘enhanced’ equivalence, relate to the City of London’s ability to market services, such as insurance and fund management to the EU single market post-Brexit. These questions will influence London’s share of international financial transactions and income, but have little bearing on future financial stability and appropriate regulation of banks and financial markets.

Diminished market access to the EU

The Chequers White paper proposes that post-Brexit the UK will be out of the single market in services. Passporting will no longer be applied to institutions. The overall impact of this is difficult to judge. It is likely that London will lose some financial transactions to the EU. It will have different implications for different financial sectors. Banking, securities trading, commodities trading, fund management, insurance and derivative clearing all will face different rules, challenges and opportunities.

There appears to be an acceptance by many significant international financial institutions that to carry out their present business with EU clients, they will have to establish offices, personnel and commit capital and part of their balance sheets to operations in the remaining EU. Overall this is unlikely to make much difference to London as an international financial centre. Its advantages of agglomeration, an effective yet benign regulator, language, time-zone and reliable mediation and court and legal services will ensure that London retains a huge advantage. The depth and liquidity of its international, money, bond and derivative markets make it the cheapest centre for financial institutions across the world to trade, settle and clear financial transactions. The ECB would like transactions involving euros to be cleared within the eurozone. Yet 75 per cent of euro currency transactions do not originate from parties based in the currency zone.

London’s modern financial markets

London is a successful international financial centre for several reasons that have little to do with ether the domestic UK economy or the UK’s membership of the EU. It can transact business cheaply, reliably, honestly and when something goes wrong there is a framework of law to sort it out. London is open to new and foreign institutions when they want to open up. It is open to people from outside and to new and better ideas of doing things even if they involve a disruption for existing firms.

In short, the modern City of London was built on allowing markets in international currencies to develop. This tolerance of innovation allows for new ways of doing things, such as the international syndicated loan market, the issuing of euro-bonds, the development of the Over the Counter (OTC) derivative market in swaps and the financial futures exchange the Liffe. When the petro-dollar crisis broke following oil crisis in 1973, London was well positioned to be the modern world’s leading financial centre and it has never looked back

If the EU ends passporting and shows an unwelcoming face to international businesses wanting to trade in financial services, as part of a mercantilist reflex to Brexit, it will not be the actions of a self-confident political community that is open to the world at large. Moreover, such a reaction would be inconsistent with the approach of an entity that realistically wants its currency to become a reserve asset that people chose for invoicing.

The rules governing bank capital are set at the Bank for International Settlements

The framework for deciding how much capital a bank should have and how it should define it is set for the major advanced economies by the Basle process at the Bank for International Settlements. The committee on setting these standards – Basle III and leading the future work on a putative Basle IV – is chaired by the Governor of the Swedish Riksbank. In speech at the LSE, Dr Stefan Ingves, the chairman of the Basel Committee for Banking Supervision, made the point that Brexit was in practice neither here nor there in terms of financial stability, because the Basle Accords set the stability rules for all the major countries. How much capital a bank needs is a different and much more difficult question. Today banks have much more capital than ten or twelve years ago, but whether it is ‘enough’ is a hard question. Banks still have much less capital than they were required to have before the early 1970s.

How liquid are trading books?

In an environment where transactions take place off the balance sheets of banks through the process of securitisation, and hedge funds play a greater role within the system which are subject to a less intrusive framework of supervision than banks, the range and depth of trading book liquidity is important. As banks have been obliged to hold more capital they have economised on capitalising less profitable trading books in repo, equity and other securities markets. There is a general recognition that bond and equity markets are less liquid than they were. How much less liquid is not clear. Bank of England economists have noted that banks play a reduced role in providing liquidity in the gilt market, but market practitioners such as investment funds have offered other sources of liquidity.

Central banks are good at pumping money in during a crisis but can they take it out?

Over the last forty-seven years since the collapse of the Bretton Woods system, central banks led by the Federal Reserve Board have dealt with a succession of crises. In general, they have made generous amounts of liquidity available. They were effective at putting cash into the system: in the Mexican crisis, the Asian, Russian and Long Term Capital Management crises in the 1990s, the Tech Wreck in 2000 and in the Great Financial Crisis between 2007 and 2009. Whether they will be as deft at draining it out is less clear, as is the question whether actions taken to remedy an immediate crisis store up future challenges.

Will the Federal Reserve be able to play the role of international lender of last resort again?

In the Great Financial Crisis, the Federal Reserve took on in practice, much of the role of an international central bank and lender of last resort. In a similar way that the Bank of England developed the lender of last resort role in the London money market in the 19th century, which was codified in Walter Bagehot’s book Lombard Street. Whether the Fed will have the scope to do so again is unclear. Legislation passed since 2008 will constrain the Fed’s discretion and in an economy-where the US plays a smaller direct role will potentially blunt its effectiveness even though the dollar is a reserve currency under its control.

The specific financial stability challenges that London has as an international financial centre

London as an international financial centre presents a particular challenge to the Bank of England. Unlike sterling it has no control over the currencies such as the dollar, euro and yen that make up the international financial markets. If things need to be stabilised to prevent an illiquid market leading to a generalised insolvency, it cannot take necessary measures in the way that it can in relation to sterling. In a world where debt is three times national income there are huge flows of liquidity, scope for asset price bubbles that often need to be challenged and it is not clear which institutions have the capacity and resources to manage these flows or the will power to do it.

This blog is based on a speech that Warwick Lightfoot delivered to the conference on Financial Regulations Post-Brexit organised by the London School of Economics on 12 September 2018

]]>https://policyexchange.org.uk/financial-stability-post-brexit/feed/0What you didn’t know about the Irish Border – how technology can resolve the issue of the North/South frontier post-Brexithttps://policyexchange.org.uk/what-you-didnt-know-about-the-irish-border-how-technology-can-resolve-the-issue-of-the-north-south-frontier-post-brexit/
https://policyexchange.org.uk/what-you-didnt-know-about-the-irish-border-how-technology-can-resolve-the-issue-of-the-north-south-frontier-post-brexit/#respondMon, 03 Sep 2018 09:40:55 +0000https://policyexchange.org.uk/?p=16676

The Irish border sticks out like a sore thumb in the Brexit negotiations. The nature of the problem that is proving so hard to solve is never fully clear. Equally unclear is why on earth it is a major issue in the withdrawal stage of the Brexit process rather than later when trade and border issues are decided. The amount of trade done across the Irish border is miniscule even by the limited standards of Ireland, never mind the EU as a whole. The need to avoid any new border infrastructure in Ireland is hardly at the heart of future EU:UK relations and attempts to prevent this border becoming a back-door for either people or goods into either jurisdiction can be effectively managed without recourse to what amounts to constitutional change.

The UK promise made in the December 2017 Joint Progress Report to avoid all infrastructure (not just new infrastructure) and all checks (not only at the border) was always ludicrous, not least because infrastructure checks and policing of cross-border activities already exist. No-one seems to have taken any notice of UN resolution 1373, to which both the UK and Ireland are signatories and indeed were both responsible as members of the UN Security Council at the time it was passed in September 2001. Section 2g of the resolution binds all UN members to “Prevent the movement of terrorists or terrorist groups by effective border controls and controls on issuance of identity papers and travel documents”.

Cameras are currently in use on the border and checks on food standards for exports occur at factories. Customs officers and police monitor cross-border activity to counter the smuggling of people and goods. Cross-border differences in VAT and excise duties make it lucrative to smuggle fuel and tobacco. In the past, the scale of fuel smuggling was large enough to endanger the very survival of legitimate fuel retailers in Northern Ireland. As a result, measures were taken to increase the numbers of customs officials monitoring smuggling.

It is not widely known that garda (Irish police officers) routinely remove people from cross-border buses, and those removed appear mainly to be non-white. The rumour in Belfast is that bus-drivers are paid by the southern authorities to provide information on suspicious passengers. Some of this may reflect the requirements of UN resolution 1373 but more likely are the prevention of illegal immigration and smuggling.

The UK’s EU (Withdrawal) Act 2018 (section 10.2b) stipulates that no new ‘physical infrastructure be created, including border posts, checks or controls. That only new infrastructure is included is clear. Less clear is whether the phrase ‘checks and controls’ applies only to those at the border itself. The main purpose of the Act was to repeal the 1972 European Communities Act and no explanation is included for the addition of constraints on border infrastructure.

As we know, the main reasons given by the UK Government were to uphold the Good Friday Agreement and to prevent a new outbreak of violence in Northern Ireland. These reasons for the undertakings on the border have always been vague and only weakly substantiated, if at all. David Davis now retired as Brexit Secretary is one of those who regard the importance of the border issue to be greatly inflated (Andrew Marr Show September 2nd). Since Gerry Adams has firmly asserted no return to violence, and regards dissident republicans as having no community support, the renewed threat of general violence is clearly tendentious. More serious are police concerns that erecting, maintaining or protecting border infrastructure could put police at risk from the small number of dissidents.

While these concerns must be taken seriously and are being taken seriously, there are a variety of ways in which they can be addressed. Both the UK and the EU have, for whatever reason ignored perfectly feasible technological solutions. Instead, they have proposed wide-ranging and grandiose, constitutional changes. The EU’s Draft Withdrawal Agreement of March 2018 is stark. It proposes a backstop ensuring no border infrastructure, including that ‘Northern Ireland shall be considered part of the customs territory of the (European) Union’. No duties or trade quotas would be permitted, nor taxes on EU products. EU law on VAT and excise duties shall apply in Northern Ireland. EU law would also apply to agricultural production and fisheries and to food standards and safety.

Not surprisingly, these proposals were described as an attempted annexation of Northern Ireland and were immediately denounced by the DUP and rejected by the UK Government. Since they clearly imply a trade border between Northern Ireland and GB they also contradict paragraph 50 of the December Joint Progress Report which rejected any such border.

The UK Government has instead suggested (in its June 2018 technical note) an alternative backstop. This is that the EU proposals should apply instead to the entire UK rather than just to Northern Ireland. Somewhat comically, this Technical Note merely repeats the text in the EU Draft Withdrawal Agreement but substitutes ‘UK’ for ‘Northern Ireland’ everywhere that the latter appears.

These UK proposals are further fleshed out in the July (Chequers) White Paper which proposes free-trade for goods between the UK and EU, with the UK subject to EU regulations for tradable goods, and following EU rules for labour markets, environment and competition policy plus state aids. This formidable list of areas in which the UK would be bound to EU rules is meeting significant opposition within the parliamentary Tory party and the passage of the White Paper through Parliament will depend on Labour support.

Since the White Paper’s proposals apply to post-Brexit trade relations, they need not be agreed with the EU until after leaving the EU next March. The accepted joint aim is to reach agreement on the Withdrawal Agreement by the EU Council meeting in October with the concurrent addition of a ‘political declaration on the future (trade) arrangements’. The latter may be detailed but could just as easily be vague and aspirational.

The problem for the UK is that its proposed Irish backstop depends on future trading arrangements that the EU have not accepted and are most unlikely to accept in their current form by October since they pre-empt future trade talks. The EU will not accept the cart being put before the horse. The EU demand is still for an Irish backstop that does not depend on any future trade arrangements with the UK as a whole. At the same time the UK rejects treating Northern Ireland separately from the rest of the UK as the EU proposes.

Both sides have thus painted themselves in corners with proposals that the other cannot accept. Some in Ireland feel that Irish concerns about a hard border will be abandoned at the eleventh hour. Similarly, nervous unionists in Northern Ireland fear that their concerns will be thrown overboard. Neither is likely or, in the latter case, even politically possible. The most obvious ways forward are for the EU to accept UK bone fides on the Irish border and move border negotiations back in line with future trade negotiations which is where they should have been all along. At that point a degree of realism might assert itself. This would involve a mix of easily available technology, equivalence of phytosanitary regulation between Northern Ireland and the EU and some checks on sensitive goods coming into Northern Ireland by air or ferry.

The details of a technological border are relatively straightforward. In the context of a free-trade agreement, with no tariffs on trade between the UK and EU, border checks can be done without personnel or infrastructure at the border itself. All customs declarations can be made online, as is becoming the norm globally. The deputy director of Swedish customs, Lars Karlsson, has repeatedly said that the progress of declared goods across the border can be monitored using standard mobile phone and GPS technology (already available in most trucks), thus avoiding fixed cameras. This monitoring technology is already in use by Network Rail, Uber and many others, and has been successfully trialled on the Norway-Sweden border. This gives an invisible border, which the head of Swiss customs, Dr Christian Bock confirmed is technically possible in evidence to the Northern Ireland Select Committee last November. Checks for illegal activity can be undertaken anywhere. With regulatory equivalence and provision for checks on sensitive goods coming into Northern Ireland from outside the EU (which the DUP can agree), most of the legitimate concerns of the EU can be met. Frequent cross-border trade by small businesses, particularly in services, can be accommodated within a free-trade agreement.

Sadly these practical solutions have been largely ignored by politicians in Dublin and Brussels – who appear to be using the Irish border as a card in their negotiating hand.

All of this could have been agreed long ago. We must leave it historians to discover why this did not happen.